RPC Inc (RES) 2015 Q4 法說會逐字稿

Good morning, and thank you for joining us for RPC, Inc.'s fourth-quarter and year-end 2015 financial earnings conference call. Today's call will be hosted by Rick Hubbell, President and CEO; and Ben Palmer, Chief Financial Officer. Also present is Jim Landers, Vice President of Corporate Finance.

(Operator Instructions)

I would like to advise everyone that this conference call is being recorded. Jim will get us started by reading the forward-looking disclaimer.

Thank you, and good morning. Before we begin our call today, I want to remind you that, in order to talk about our Company, we're going to mention a few things that are not historical facts. Some of the statements that will be made on this call could be forward looking in nature and reflect a number of known and unknown risks. I would like to refer you to our press release issued today, along with our 2014 10-K and other public filings that outline those risks, all of which can be found on RPC's website at www.RPC.net.

In today's earnings release and conference call, we will be referring to EBITDA, which is a non-GAAP measure of operating performance. RPC uses EBITDA as a measure of operating performance because it allows us to compare performance consistently over various time periods without regard to changes in our capital structure. We're also required to use EBITDA to report compliance with financial covenants under our revolving credit facility.

Our press release today, and our website, provide a reconciliation of EBITDA to net income, which is the nearest GAAP financial measure. Please review that disclosure if you are interested in seeing how we calculate it. If you have not received our press release for any reason, please visit our website at www.RPC.net for a copy. I will now turn the call over to our President and CEO, Rick Hubbell.

Thank you, Jim. This morning, we issued our earnings press release for RPC's fourth quarter of 2015. The devastating industry downturn that began at the end of 2014 continued through the fourth quarter of 2015. The US domestic rig count declined 60% in 2015 and has declined an additional 9% since year end. The prices of oil and natural gas continued to decline by similar orders of magnitude.

Our quarterly sequential revenue change was slightly better than the sequential rig-count decline. In this environment of continued declining commodity prices, customers who are working are seeking lower completion costs, which greatly impacts already strained prices for our services. As we begin the first quarter of 2016, our customer plans continue to be revised, a situation which gives us very limited short-term visibility for the demand of our services.

I'm pleased to report, at the end of 2015, RPC was debt free and made progress on several important initiatives. We have refined our focus on equipment maintenance and refurbishment, and are making operational efficiency improvements where possible. Our CFO Ben Palmer will now review our financial results in more detail, after which I will have a few additional comments.

Thank you, Rick. For the fourth quarter, revenues decreased to $268.1 million compared to $632.2 million in the prior year. These lower revenues resulted from decreased activity levels and pricing. EBITDA for the fourth quarter decreased to $9 million compared to $187 million for the same period last year. Operating loss for the quarter was $57.4 million compared to an operating profit of $125.6 million in the prior year.

Our losses per share were $0.18 compared to diluted earnings per share of $0.36 in the prior year. Cost of revenues decreased from $390.5 million in the fourth quarter of the prior year to $217.4 million, due primarily to lower activity levels, supplier cost reductions, and lower labor costs, partially offset by higher service intensity. Cost of revenues as a percentage of revenues increased from 61.8% in the prior year to 81.1% in the fourth quarter of 2015.

Selling, general, and administrative expenses decreased from $50.4 million in the fourth quarter of the prior year to $36.6 million this year, due primarily to decreased employment costs. SG&A expenses as a percentage of revenue increased from 8% last year to 13.7% this year, due to negative leverage resulting from lower revenues. Depreciation and amortization were $66.2 million during the fourth quarter of 2015, an increase of 7.4%, compared to $61.6 million in the prior year. Depreciation and amortization increased due to assets placed in service over the last year. Net loss and disposition of assets was $5.3 million in the fourth quarter of 2015 compared to $4.2 million during the fourth quarter of 2014.

Our Technical Services segment revenues for the quarter decreased 57.8% compared to the fourth quarter of the prior year. Operating loss was $45.4 million compared to an operating profit of $122.5 million in the prior year. Revenues and operating results decreased due to declines in activity and pricing. Our Support Services segment revenues for the quarter decreased 54.9% and incurred an operating loss of $3 million compared to an operating profit of $11.3 million in the fourth quarter of the prior year.

On a sequential basis, RPC's fourth-quarter revenues increased to $268.1 million from $291.5 million in the prior quarter, a decrease of 8.2%. The decrease in revenues was due to slightly lower pricing and activity levels. Cost of revenues decreased to 7.3% from $234.6 million to $217.4 million, due to lower activity levels. Cost of revenues as a percentage of revenues increased slightly from 80.4% in the prior quarter to 81.1% this quarter.

SG&A expenses decreased by $751,000, or 2%. As a percentage of revenues, these expenses increased from 12.8% in the prior quarter to 13.7% this quarter. RPC's consolidated operating loss increased from $52.9 million in the third quarter of 2015 to a loss of $57.4 million in the fourth quarter. RPC's sequential EBITDA decreased from $15.4 million to $9 million in the fourth quarter.

Our Technical Services segment generated revenues of $250 million, 7.8% lower than revenues of $271.3 million in the prior quarter. We reported an operating loss of $45.4 million compared to a loss of $44.2 million in the third quarter. Revenues in our Support Services segment declined by 12.3%, due to decreased activity and pricing in rental tools. Our Support Services segment incurred an operating loss of $3 million in the fourth quarter compared to a loss of $1.9 million in the third quarter.

As of year-end 2015, RPC's pressure-pumping fleet totaled 930,000 hydraulic horsepower, of which approximately 70% is staffed. Capital expenditures during the fourth quarter was $12.2 million and the full year of 2015 was $167 million. RPC's full year of 2016 capital expenditures are currently projected to be $[60] million.

During the fourth quarter, we completed the goal of paying off RPC's debt, which at the end of 2014 was $224.5 million. This was accomplished through focused management of our working capital and cost structure, coupled with prudent capital allocation. And with that, I'll turn it back over to Rick for some closing remarks.

Thanks, Ben. During the quarter, we continued to focus on reducing costs, most notably in the 2015 RPC -- end 2015, RPC reduced its headcount 32%. While we constantly monitor our business and cost structure to ensure they are appropriately scaled, we stand ready to make additional actions if the industry conditions deteriorate even further. The strength of RPC's balance sheet provides us with the ability to survive this downturn and maintain our equipment to our high standards.

Although this is certainly one of the toughest down cycles ever, RPC's Management has the experience to position the Company to thrive when market conditions improve. As we have said before, these are difficult times and their impact on RPC and its employees has been severe. We appreciate all of our employees' hard work, contributions, and sacrifice. We'd like to thank you for joining us for the call this morning.

At this time, we will open up the lines for your questions.

(Operator Instructions)

Ole Slorer, Morgan Stanley.

Thank you very much. It must be nice to be debt-free in this environment, that's for sure.

Yes, it is, Ole. Lets us breathe a little better.

Rick, I noticed a comment in the press release: we are assessing other opportunities to utilize our balance sheet. Could you expand a little bit about what you mean by that?

No. Just the fact we have the ability to be able to do that. We have not identified anything and there's no active discussions about anything, but we remain open to any possibilities, and with the balance sheet, there could be several possibilities.

Yes, I would imagine. Could you help us a little bit with the operating environment as we enter 2016. I realize that making forecasts at the moment is a pretty pointless exercise, but how is your business and industry trending in the first quarter compared to the average of the fourth quarter, and with respect to prices and volumes? And what do you think the trajectory will be through this quarter?

I would characterize it basically that the fourth quarter was maybe slightly better than we were expecting. The holidays didn't impact us quite as much. We have been for some time expecting the first quarter would be more difficult than the fourth quarter and I believe it will be. We're not seeing anything disastrous, but it is a bit more difficult and that is not unlike a normal seasonal period for the business that people get off to a slow start at the beginning of the year and there's also probably other factors impacting that at this point.

But you are right, in terms of visibility, we commented on that, it's very difficult at this point in time, so we're just having to watch the business day-to-day, and just like we said in our comments, watch our cost structure and the business and adjust as we go along, but we clearly want to try to take advantage of our balance sheet, whether that's transactions, or whether that's just positioning ourselves again for the eventual upturn. But the trends, yes, very difficult to see any clear path forward at this point. Jim, anything to add?

If your customers are asking you to help them save costs at this point, is there anything more you can do, looking away from this pure pricing, is there anything you can help them with in terms of reorganizing your business or their business or is that more or less all taken out at this point?

Ole, this is Jim. The one thing that has happened and may be able to continue to happen is changing job designs. Customers have come to us to talk about price reductions. We turn the conversation as quickly as we can to cost reductions and talk about job designs. So part of that is very doable with different proppants and different kinds of job designs.

What we always seek, however, is more efficiency, and at lower activity levels, that's very hard to accomplish, isn't it? So if a customer has a small number of wells, it's very hard for them to promise us or for us to think about doing a lot of things efficiently and therefore leveraging fixed costs. So the low activity levels now make those discussions increasingly difficult. So that's a bad situation.

Understood. Thank you very much. I will hand it back.

Jim Wicklund, Credit Suisse.

Well Ole asked all the good question. I had underlined the same one, the use your balance sheet. I'll get you back, Ole. Guys, this is an opportunity for introspection, as well, and we're all thinking about what the industry is going to look like coming out of this recession.

People keep talking about how oil companies are changing their behavior and letting you help them with completion designs, et cetera. Where do you think that a [cud] should go or should be? What should be different in three years in how [cud] approaches the market, or RPC approaches the market, than just keeping your current equipment fleet ready to go back and do the same thing?

What else do you need -- should you have or can you be able to do. Schlumberger is on this gig of more and more people at the well site. What is RPC's strategic vision for the future, and not that there's anything wrong with waiting for things to come back, but you've got to look somewhat different, right? How should that look?

Jim, we expected erudite and far-sighted questions from you and have not been disappointed. That's a great question.

Hard to know in this environment. One thing that we've harped on all of 2015 is increasing service intensity. There are some reasons for that, some relating to the current market, some relating, though, to better technology, which allows people to see better parts of the rock. That allows people to space racks differently, concentrate them more closely, and it's just a financial calculation to put more proppant in the frac.

So we're certainly looking at and would like to participate in the technology that helps customers do that. That would be something that could offer us a competitive advantage if we are able to do that, not only by just offering the service, but having it as part of a bigger package. That's one thing that we're looking at right now.

I agree. Jim was spot on. There are some things we are looking is -- will it be transformative, the things that we are looking at right now. It certainly will be of a benefit, but if you were to ask if three years from now, if we were to accomplish those things, would it make us look completely different, I don't know that it would--

It wouldn't be completely different, but like Ole's question, market expectation is that you and other people with a decent balance sheet will just go about buying more pressure pumping assets and you'll get bigger, but I'm just not sure that bigger is all -- and just doing one thing is always that much better?

That's right.

My follow-up, if I could, I appreciate, Ben, your comments on the working capital increase, but how, other than sending a [veto] out with a bunch of guns -- everybody else is suffering through slower and slower pay customers -- how did you guys do that? There has got to be some strategy other than gosh, it just turned out everybody paid on time?

It gets back to a lot of the legacy things. We do have a credit process that we've followed for years, and in the current environment, we certainly have adjusted that some, and will continue to review it and adjust it, so it starts there. It's good customer relationships and good customers. It's trying to focus on billing and billing accuracy.

We had some struggles, as everyone does, a lot of customers trying to go to EDI billing, which they aren't always as helpful as we'd like them to be helping us get the bills into their systems so that they can be paid. So we had to spend a lot of time focusing on that and a lot of it was just hard work and focus. We just said, hey, this is key, we are going to pay our debt down and one of the easiest ways to do that is to get our working capital down and AR was certainly a target for that, and I'm pleased to report that, yes, our DSO is actually lower today than it was a year ago. That's a testament. Not only did revenues come down and we collected our AR, but we also reduced our DSO.

We've concentrated on getting our billing out quicker after the job.

Whatever you are doing, it's working, so keep it up. Okay guys, thanks a bunch.

Thanks, Jim.

Waqar Syed, Goldman Sachs.

Thank you very much. I didn't get the CapEx number for 2016. Could you kindly repeat that?

We said $60 million, and we believe at this point, that will be more back-ended, so obviously there's a lot of control over that number but that's what we're seeing right now. It's obviously a very low number

Okay, great. And secondly, you had some asset sales. Could you provide some color on what those were and what did -- how much cash did you receive?

Not really. We had losses on dispositions, so that was really more some write-offs or equipment that failed before the end of its depreciable life. That's really what that was. We didn't generate any appreciable amount of cash from selling assets,

Okay, Then in Technical Services, your revenues were down 7.8%, so much less than the decline in rig count. Did your job number -- number of jobs that you performed also fell less than the rig count or was it revenue per job actually picked up some because of a rise in service intensity?

It was less so service intensity on a sequential basis.

Service intensity did increase, Waqar, but not by a lot, so it was more job count that declined by less than the rig count. That was the metric that drove that for the quarter.

Okay, great. Then also, voluntarily, you've reduced your borrowing capacity. What was the rationale there?

Just to save some money on loan fees.

Does that affect your ability to make acquisitions or--?

In and of itself, yes, but we feel that if there was an opportunity before us, we don't feel we'd have any trouble going and borrowing.

We can go back up just as quickly as we went down.

Okay, that makes sense. Then could you provide us with some -- the percentage breakdown of the different business lines within Technical Services?

Sure, Waqar, this is Jim, happy to do that. What I'm going to give you is percentages of consolidated RPC revenue for the fourth quarter of our major service lines that we usually discuss.

The first is pressure pumping, which was 54.6%. The second was through-tubing solutions at 18.6% of consolidated revenues. Number three was coiled tubing, which was 8.3% of consolidated revenues for the quarter. Number four was our nitrogen service line, which was 3.7% consolidated revenues for the quarter. The last one that we discussed and call out separately was rental tools; that was 3.2% of consolidated revenues for the fourth quarter.

Great. Thank you very much. Appreciate the color.

Sure, Waqar.

Chase Mulvehill, SunTrust.

Good morning, fellas.

Good morning, Chase.

The first question, when you are out in the market, and you lose jobs, in general, what type of service companies do you lose work to? In other words, who are you competing with mostly in the market? Is it smaller players, larger players, mid-sized players?

The answer is yes, but it's a smaller number of people. We were doing our fourth-quarter reviews recently. We heard about losing out on pricing to those providers who were bigger than us and we've also continued to see smaller people who are financially stressed who are working to make $1 of EBITDA because that's what the banks are looking for. So we've actually seen it -- we continue to see it from both the larger and the smaller people.

I would say that pricing pressure from the much larger people has probably abated. We've also seen the bids coming in a little more tightly spaced than they have been, so those are, I guess we call them positives but it is still a very bleak landscape in terms of when it comes to pricing and oversupply and the competetive nature of where we are right now.

And so when you lose share from the large guys, are you seeing that they are bundling more completion services together or is it just absolute price?

We are not seeing the bundling at this point.

Okay. All right. I'm going to attempt to try to get some color around 1Q. Any color you can provide on 1Q revenues or EBITDA margins? Obviously down, but would you expect it to be in line with the rig count, or would you expect it to outperformed the rig count, and then what about remaining positive EBITDA margins?

Chase, we anticipate positive EBITDA in the first quarter. The customer plans we've heard of recently have been changing and many times been revised downward. A large E&P last night reported that their 2016 CapEx would be -- they were reducing that by 66%. Now maybe that was a special situation, but we are currently, as we speak, seeing customer revisions down lower so that makes it difficult to predict.

I would say that our revenue probably is going to fall in line with the rig count, whatever the sequential rig count decline is at this point, which as Rick mentioned earlier is down 9% in the first three weeks of January. We don't know what the rest of the quarter holds.

Right. Okay. Last one and I'll turn it back over and jump back in the queue. For stage counts for you guys, what was stage count down in the fourth quarter and for 2015?

I'm not sure I had that right in front of us, Chase.

It's okay. I can circle back on that.

Okay, We may come back to you on that one.

Okay, okay, all righty.

Fair question.

Thank you. I will requeue.

Okay, thanks.

Marc Bianchi, Cowen.

Good morning. Just a follow-up on Chase's comment, or a question around the direction of margins into the first quarter. You had really impressive decrementals in the fourth quarter, 5% for Technical Services.

Can you talk to us about the pace of cost reductions that occurred maybe in the third quarter or in the fourth quarter that might have benefited you on a decremental basis in the fourth quarter and then how do we think about that playing into the first quarter? Should be see an uptick in the decremental just because the benefit of cost is fully absorbed?

There's a lot of calculus that goes into that. We -- clearly costs came down some third quarter, costs had come down some in the fourth quarter. At this level, we're not currently looking at any significant additional decreases in costs unless we take specific action and that's not planned at this very moment. Again, but we're watching it very, very closely. We're not going to -- we will not stand by and incur negative cash flow for any extended period of time.

One of the opportunities to use our balance sheet is to make sure that we're as staffed as we reasonably can be and still generating positive cash flow because you can have all the equipment in the world but if you don't have the people to run it, you are not going to be able to generate any revenue. So that's one of our clear opportunities is to be quote-unquote appropriately staffed, trying to generate cash so that we are ready to work immediately when things turn. That's one of the opportunities [to drum] strive for.

What level of quarterly revenue would you say that you are currently staffed for? If you could be fully utilized with what you are staffing is today, how much revenue do you think you would be able to chase?

We mentioned that about 70% of our hydraulic horsepower is currently staffed. That's a comment relative to pressure pumping. One could do an extrapolation, but I'm not sure. It's may be a reasonable question but I'm not sure. We're not expecting to be fully utilized in the near-term with our equipment.

Sure. Okay, maybe just one more as it relates to pricing. I know the general trend is of pricing heading lower, but there was some commentary during the fourth quarter perhaps from one of our competitors that there were some anecdotes of pricing increasing? Can you just talk to that? Have there been any green shoots that you have seen anywhere or was that just some erroneous reporting that occurred?

Mark, this is Jim. I wouldn't say that was erroneous; I would say that we just have not experienced any pricing increases. We have told customers that we are not going to go any lower or to bring new equipment in, we'd have to do at a higher price than we are currently doing things, but that there have been no actual financial results that would include higher pricing for our services.

Got it. Okay thanks, Jim, I will turn it back.

All right. Thanks, Marc.

Rob MacKenzie, IBERIA Capital.

Thanks, guys. My question for you is you are probably the only service Company -- I know you're the only service Company I follow that has not attempted to back out any unusual items from reported earnings. I know there are costs associated with stacking equipment, shutting down bases, severing people.

Have you attempted to quantify the margin impact that we might have seen here this year from that and/or on the flip side when we stop having severance costs, stop having $5.3 million a quarter in loss and disposition of assets, what would the positive impact of that be once market starts to round to the corner?

We've not carved those things out. We've not had in any one quarter any significant items. Full-year 2015, I don't really have that in front of me. I would say probably the number in the last couple of quarters, if one were to -- it's a tight rope to walk -- but there's probably been $5 million to $10 million a quarter that we've recorded that might be considered unusual or out of the ordinary or whatever, so just really not that much to call a whole lot of attention to, but a relevant point that you asked.

Yes, Rob, in this environment I'm not sure those items are unusual. When you do them four quarters in a row, they become business as usual. So it's hard to say, and I know what you are thinking about is probably the future, and what might our income statement look like, and you need a base to forecast off of.

We've gone through it -- for whatever this is worth -- we sit here today and say we don't see anything else of any magnitude either that's going to be incurred in the first quarter or going forward but you always have to monitor and respond to what you see ahead of you.

We have spent a lot of time in the last few months reviewing our fleets of equipment, making sure that we are comfortable where they are, where they are going to be maintained, where they are going to be staged, again how we are staffed, what our strategies are in that regard. We're very comfortable with that, so obviously we haven't reported any tremendous asset write-downs, so we're comfortable with where we are positioned right now, and as I said, we don't see any large adjustments prospectively either.

Okay, so the loss on disposition of assets we've seen in the past couple of quarters, you don't expect to recur here in the first or second quarter?

If you look back several quarters, we generally do have loss on disposition due to components and so forth that fail before the end of their depreciable life, so we have historically had some volume of that, but you have not seen in the last couple of quarters any tremendous amount of one-off asset write-offs because of the current environment.

Okay. That's helpful. Jim, I wanted to come back to the service intensity versus job count question a little bit, if I may. When I look at it on a year-over-year basis, revenue per rig in the US, fourth-quarter 2015 over fourth-quarter 2014, you guys are up about 7% year-over-year. Halliburton actually comes out the exact same percentage, up 7% for North America in terms of how they disclose. All that 7% growth in revenue per rig for you, or however you want to look at it, how would you say that would split on a year-over-year basis between service intensity versus job count?

It would all be service intensity. Job count is down, so those metrics, which thank you for pointing them out, all relate to service intensity. I will go back to an earlier question from -- or I will work a little bit on the earlier question from Chase at SunTrust, our stage count during the fourth quarter sequentially increased a bit. It increased probably low to mid-single-digits.

Our service intensity, and we measure that in terms of pounds of proppant per stage, not necessarily well. I know some of our peers do it by well, but we're talking about it by pounds of proppant per frac stage, increased as well but by a smaller percentage in the fourth quarter. 1% or 2% compared to higher service intensity increases on a sequential basis in previous quarters.

When we analyze fourth-quarter with volume at historically low levels, sometimes the answers to those questions are customer-specific. We've had some good customers who are doing service intensive job designs and that's what's helping us. So it is -- and we were trying to sit around and quantify it last night, it's those kind of metrics, when they are improving or increasing at RPC, relate to service intensity.

Great. Thank you very much. I will turn it back.

Okay, Rob. Thanks.

Michael LaMotte, Guggenheim.

Thanks. Good morning, guys. Just a few follow-ups, if I may. Can you help me reconcile a 70% stacked equipment rate with headcount down 32%? It would seem to suggest that you've got some warm-stacked capacity or at least the ability to put some equipment back to work relatively quickly?

70% of the equipment is staffed.

Staffed. Okay, that makes a lot more sense. Thank you for clarifying that.

Thank you for letting us -- sorry, it was clear. That's the most important (laughter).

Okay. Muffled phone speaker here. At least that's what I'm going to blame it on.

The job count question, I'm curious if customers are focusing at all on vendor liquidity, whether the health of your competitors is actually translating into more work for you all?

Maybe. What we've heard anecdotally is that customers are looking at the length of their project and if the length of a project extends beyond the expected solvency of the service provider, they will look at somebody who they think is stronger financially. However, though that sounds favorable, everybody is doing such short-term planning and short-term things right now that it's hard to say that, that's translating into maybe better activity, but it's certainly something that we have heard, so again, that if the duration of their project is long enough, they will use that as an item for consideration.

We try to point it out as often as we can.

Yes. Any competitive advantage you can leverage, right?

Exactly.

Okay. Then as I look at gross margin over the last three quarters, from Q1 of 2015 to 4Q of 2015, revenues came down almost 35%, but your gross margin as it has been pointed out a few times on the call, is remarkably flat. Can you try to break down a little bit, just perhaps component-wise, the impact of deflation in things like sand, your changes in cost structure, any pushback that you are able to get versus market pricing because of your service quality, and anything else that might be contributing to that?

That is a great question. I would love to have a bridge between one gross margin and the other because, as everybody knows, pricing is down a lot. We've certainly had raw materials cost decreases, we've regrettably laid-off people, and then for the people who remain we've done variable compensation cost reductions as well. So those are the items driving that.

We've really tried to utilize equipment as prudently as possible, meaning that we want to keep things utilized and only stack things when we have to, and long-term that helps us. It's hard to segregate that.

I'd certainly say philosophically it looks like, per an industry that is known to have a high degree of fixed costs, it's almost as if you are running the business as if there's no such thing as fixed cost.

(Laughter) it just indicates -- I was about to say that our people have done a very good job of stair-stepping the employment down as revenue was staging down. Because as I said earlier, just for the sake of our employees, but also opportunity for the Company, as long as we can keep an amount of our equipment busy with our people and we can at least generate a little bit of cash flow, the better off we're going to be in the long run.

We could go right now, go out and reduce our headcount significantly immediately further, but I'm not sure that's prudent, but again we're not going to sustain negative cash flows for any extended period of time. So we are trying to hold on, again, for the sake of our employees, but also the sake of the business, and let us capture the upside when things do turn [as much as possible].

Okay. Then Ben, you talked about receivables and collections. In the press release, there was a broader comment about improving business processes. I'm wondering if beyond the collections process, if there are other anecdotes that you could provide in terms of opportunities that you all have taken to improve the structural costs in the business?

Improve the structural cost -- we constantly focus on all aspects of our cost, the direct costs, which are more the people that are focused on providing the services, primarily at the well site, and then we have our overhead costs and we've historically focused very much on trying to keep that as under control as possible, keep it minimized where we can. So in some respects, there's not huge amounts of opportunity there.

There's a certain amount of infrastructure you need in place to run the business. What we're really have been focused and want to continue to stay focused on during these times is to try to improve some of our processes, like collections, but also some of our systems and other processes that will allow us, when things do come back, that we're not trying to make improvements in the middle of when activity picks back up, number one, and number two, that it will allow us to leverage our existing infrastructure that much more. There are a number of different opportunities.

We're going through and evaluating those and prioritizing those opportunities, but now is a good time, in my opinion, for us to be focused on those things while we can. This is a good environment to make changes, make improvements, and again set us up, so we can leverage our existing infrastructure as much as possible. We've done a good job of that over the years. Now is a good time to have a further improvement or be able to capture that benefit even more to make sure that we can add a lot of business activity levels without having to add tremendously to our fixed infrastructure and overhead.

It makes a lot of sense. Last one, hopefully quick clean-up. D&A for 2016, is fourth-quarter run rate reasonable enough, estimate for 2016?

It's going to fall a little bit more than that.

Be a little bit higher than fourth-quarter annualized?

No. Lower.

Lower. Lower. Okay. That's what I thought.

That's correct.

All right. Thanks, guys. I will turn it back.

Okay. Thanks.

Brian Uhlmer, GMP Securities.

Good morning, guys

Good morning.

Hey, Brian.

Had a quick question. You mentioned customers coming to you when you were talking about changing the job description or how the job gets done. Have you seen a systematic move away from white sand to brown sand? Is that what you are talking about or could you clarify that a little more?

Brian, this is Jim. I wouldn't call it systematic. Our operations people have said that, that is one thing that's happening and we can see that in the numbers a little bit. My understanding, not a technical person, brown sand being more angular and less consistent grain sizes, some people use it and then use it for a long time. They are doing well of that and continue to. I don't think that is a huge secular shift, if you will. Things like that are what's happening, but I don't think that's big.

Great, thanks. Following up on that, and I hope to one day be called erudite with my questions, I strive for that (laughter).

If you know what it means, that's a good first step.

I had to ping Jim and ask him what it meant (laughter) but now I've got it down. Is the proppant side of the business something that you guys would consider longer-term as something important to be important to be part of for you for [CUD] and for the Company?

Brian, I know you are slightly new to the story, although you are very experienced and do know us well. We actually are in the proppant business. We have sand mine that provides some percentage -- a small percentage -- but some of our natural sand needs. It's up in Wisconsin. So we are in [that business].

Okay. I worded that poorly. Would you consider the brown sand mines that have closed down recently and expanding in the Texas market, since you have such a [deep] Permian focus?

That is a great question. That is not on the list of items to consider right now. I would say probably not.

It's a very reasonable question.

Yes, it's a very reasonable--

Brilliant question, actually. Erudite, one might even -- (laughter).

When I was out there in Midland a few -- a month ago with one of your guys, you were talking about how great the transload facility is of some of the guys that you're using trying to figure out and so I was trying to figure out if that's a good use of capital to compete with those guys or do you think that they are doing as good of a job as you can do and your preference is to stay with using them as third parties?

Probably would stay with third parties. We've learned a lot being in the sand business. We've learned that logistics are such a huge deal. What you just said was that there are good logistics in the area, so that's true. It's a very reasonable question.

We have confirmed that the sand business is just as or more cyclical than other aspects of (inaudible) (laughter).

That's right.

Unrelated follow-up, you mentioned your PR comments of a lot of folks in the industry about capacity going away or being poorly stacked. You talk a lot about your stacking procedures. I was curious if you have -- if you agree with those numbers or do you have some internal expectations? I've heard some of the small caps say up to 7 million horsepower going away, Halliburton saying 4 million to 6 million. I'm curious what your thoughts are on that currently?

Brian, our estimates will fall right in there. We know a lot of the anecdotes and we've seen first-hand a lot of the things that you've seen and our peers have seen. It's somewhere in that range. We will not know the answer until the industry is called back to active service and we will only then really know how much equipment can't work. You know how this equipment degrades when it sits around.

Some of what we've alluded to today has been a fleet assessment process where we make darned certain that we are maintaining our stacked equipment, both in compliance with warranties and so that it can come back to work right away. We do know that a lot of our peers who are more aggressively capitalized aren't able to do that.

Is that 4 million hydraulic horsepower that needs to go to the boneyard or is it 7 million? It's some number like that. Again, we don't know until the North American -- US land market for hydraulic horsepower demands something like 14 million. That's when we will know, unfortunately.

Perfect. And a last one-line clean-up, you mentioned some severance expense being layered in -- you don't call it out one-time, of possibly a few million. Does that imply that the G&A run rate for next year will be down? I didn't think I heard you guide it, but if I did I apologize?

We didn't guide it. I'm not expecting any significant change in SG&A currently. Use current numbers.

Use Q4 as the current run rate? Perfect. Thank you. Turn over.

Thanks Brian

Scott Gruber, Citigroup.

Yes. Good morning, gentlemen.

Good morning, Scott.

Turning back to the strategy question, you've now gotten your frac fleet to over 900,000 horsepower. I'm curious about scale benefits in the industry. Have you realized those with the current size of the fleet? Are there additional benefits to expanding the fleet further as you think about leverage on your suppliers, infrastructure benefits, logistics benefits. Are there any additional benefits, above and beyond just leveraging your overhead, that you would gain from additional growth in frac?

Scott, this is Jim. It's another very reasonable question. Let me try to address it this way. First of all, of our 930,000 hydraulic horsepower, it has not all been fully utilized because the 930,000 is a result of about at 28% fleet expansion where we started taking delivery in the third quarter of 2014, so we haven't realized the scale benefits of the 930,000 yet.

Another answer to the question is that going back in history, when the natural gas shale plays first kicked off eight or ten years ago, that was one step up, where scale was important and we needed, say, 50,000 hydraulic horsepower instead of 20,000. So that was one step up.

Then the next step up was in the most recent cycle where logistics were so important and you needed a big logistical infrastructure to do anything. So if you have a good logistical infrastructure going, you need a good fleet or a big fleet to go along with it.

Those are the two step-ups. We don't see, because the business does remain fragmented, certainly on how the customers look at things, I don't see us needing 1.5 million hydraulic horsepower to compete effectively in the next step-cycle. There may be another -- something else around the corner that tells you, you do need that, but we don't see it right now.

Got it. And then you may have mentioned it earlier. I missed it. You said 70% of your equipment is staffed. How much is working today?

It's staffed, but again not working every day, so that's just an indication of what our capabilities are in our time with staffing relative to the amount of horsepower we have available.

It would maybe work for that 70% of equipment that is staffed?

I'm sorry, can you repeat that?

Just to clarify. The 70% of equipment that is staffed and marketed today is just experiencing intermittent work so it's tough to quantify a proportion of your fleet that's actually active today. We should just take the 70%?

Right. You're correct. That's right.

Got it. Okay. Thanks.

Tom Curran, FBR Capital Markets.

Good morning, guys.

Hey, Tom

Very thorough Q&A thus far. Returning to the opening line of questioning between Ole and Jim, one of the main themes there, when it comes to the potential acquisitions you might be interested in on the transformative side, have you at least been able to identify potential prospects out there that you'd be interested in irrespective of valuation or whether they might ultimately want to sell? Whether it's rock diagnostics or some other form of technology, have you at least been able to identify potential private companies of interest or when it comes to what you might do on the transformative front, is it instead increasingly looking as if that would have to be an organic undertaking, possibly even involving a move towards R&D?

Good question.

Tom, good question, and in one of our meetings with [your] clients earlier in 2015, you articulated that pretty well. There is nothing pending at this point. We've talked to some people who have ideas, that is probably the best way to say it. So that would probably indicate that if we are successful in an endeavor like that, it would probably be an organic start-up rather than a business combination of some sort and that's just--

And the whole R&D question, we do have R&D currently, nothing significant, but we've had some very nice successes, especially in certain particular areas of our business. But to get into a big R&D effort around fracturing, that would take a lot of thought on our part, especially in the current environment, to try to crank up a critical mass in that particular area would -- to Jim's point, we love -- historically organic growth has worked very well for us. I'd almost believe that we probably have to kick-start that with some sort of acquisition or some sort of impact team or whatever team or group of people that had some knowledge that we could bring in. It would be difficult to start it from the ground floor.

But again good question, and something that we are thinking about and working more on than we have in the past and looking for opportunities. I can't say that I have with me or at my desk a list of 10 private companies that we're currently targeting, but we're trying to identify, and are always open to being opportunistic when opportunities arise.

Okay. Did you have any opportunity to explore a relationship with Energy Recovery when it comes to accessing their VorTeq hydraulic pumping system? Are you aware of -- so that's the first question, and based on what you have learned about it, what are your expectations for it? And are you aware of any other similar competing technologies that are out there currently or might soon be hitting the commercial arena?

This is Jim. The quick answer to those questions is no. What little I would even claim to know about that company and its process, some of our technical guys have talked to us about it, a lot of people are trying variations on that. The basic idea, keeping the abrasive stuff out of the iron for as long as you can.

But I don't have any specific knowledge that's useful about how it's going or what obstacles they might have faced and what the path forward is. There are a lot of variations on trying to do that. I'm not saying that in a way to denigrate the effort that's going on there with Energy Recovery, but it seems like a great concept to our technical guys [all in].

Okay. Last one for me. Jim, when it comes to the various internal efficiency and cost saving initiatives that are underway, do you have any metrics you are focusing on that you could share with us, any targets as we move through 2016, ideally that maybe could be translated into a focal target for margin? Are you looking to be able to realize an additional 200 or 300 basis points of margin regardless of what happens with utilization and pricing through those initiatives?

I would say, no we don't have any particular targets. From an SG&A infrastructure systems support standpoint, what we would hope to do is to be able to again take on a lot more revenue and add little additional infrastructure cost. That's what we hope to achieve and our SG&A is been as low as, I think it was 8%.

7%.

That's pretty good. I would like if we can keep it in the single digits in a quote-unquote normal environment or normal point in the cycle. That's pretty good. To drive it down a lot lower than that would be difficult, but certainly that will be what we will strive for, to keep it as low as we can. The way to do that is improve our processes and be able to leverage what we have when things come back.

And so when we talk about some of these operational improvements, it's more [obviously] -- it's probably infrastructure and back-office, but certainly from a direct and service delivery standpoint, that something too that we are looking at, but again reasonable question, but we don't really have a target right now, especially for 2016.

2016 is very fluid, very hard to predict whether that would show up anywhere at this point in time, but clearly continuous improvement is something that we strive for and we expect that, as we always do, seeking improvements in processes, that flow through to the gross margin and the operating margin, so we haven't quantified anything yet at this point.

Tom, some key operating statistics might evolve like crew efficiency metrics, things of that nature, but back to a point Ben made earlier, we are working on these things right now because activity levels are so low. Efficiency improvements won't be realized or necessarily measurable until activity levels improve.

That makes perfect sense and those are fair answers. I appreciate the responses, guys. I will turn it back.

All right, Tom. Good talking to you.

John Daniel, Simmons & Company.

Thanks guys. Jim, on the horsepower, can you -- just to clarify how much of the horsepower today is idle?

30% is stacked, roughly.

Got it. Thank you. Want to come back to some modeling questions. You noted that revenue for Q1 would likely track in line with the rig count and I believe you cited the rig count being down 9% already this quarter. But when you look at the quarter-over-quarter average, the rig count is actually tracking down closer to 17% or 18%. I'm just curious, are you more comfortable with revenue being down 9% or more in that quarter-over-quarter number which would be a high teen?

Probably in the mid- to high teens, John. High teens. I don't know of any more customers have announced 66% CapEx cuts during this call, but that mid-teens sequential decline is probably more reasonable.

Okay and hopefully we don't get many 60% announcements, but most of us on this side of the phone call are looking at the E&P sector, probably seeing declines on average of 40% to 50% year-over-year in capital spending. If that's right, would you expect your revenue in 2016 to be down similar to that?

That is one factor that drives revenue and clearly it's the biggest one, but if that happens, there are going to be fewer pressure pumping service providers than there were a month ago, so we'll get some market share gains. And if the catalyst of drilling in your core areas and doing more with less continues, then we'll get some service intensity increases. That does not translate into a year-over-year revenue increased by any stretch of the imagination.

But that would be sort of but for maybe different reasons a repeat of 2015 where our revenue declined but by slightly less than industry activity. So there is that major catalyst that you just cited in that spectre of continued CapEx declines with a few offsets for RPC, and that harkens back to our strong balance sheet that Rick and Ben have been talking about and this service intensity increase.

Okay. Just one that might put you on the spot a bit, but everyone talks about the horsepower going away and there's lots of different estimates up there, and yes we have seen some, but when you talk to a lot of the frac companies individually about how much of their horsepower truly goes away, the numbers seem a bit lower. So my first question to you, how much of your horsepower do you expect will go away this year?

It's a number close to go zero, so we are join the rest of everybody else saying the pressure pumping fleet is going -- [attrite] but not ours. As we're going through this fleet assessment, we're finding some older pumps that we're going to let go of, but it's not because the industry is depressed; it's because they are just too old and not worth fixing anymore, but that will be a minimal number.

That's a 935,000 down to 930,000 that we're talking about. We do a few pumps -- not a large number, but we do have a few that need to be -- that have ticked over into needing a refurb. We wouldn't want to send them out to a job, so we're planning what's the timing of trying to refurb those pumps, but we're not at this point in time saying were going to rush out and spend the money to bring them up to speed, but we are not retiring them, we're not cutting them up, we're certainly not selling them. But that's not a significant number either. It's not a significant number that are uncapable of working.

Okay. I know you guys enjoy a different position than a lot of your peers, but -- okay, the next one I've got is of the 930,000 horsepower you've got right now, and you guys did have a pretty aggressive new build program over the last couple of years, how much of your horsepower is brand-new that has yet to ever be deployed that's just sitting waiting for the cycle to turn? Do you have any of that yet [left]?

Yes.

Can you say how much?

We will give you an estimate.

It was 120,000, 125,000 or so.

125,000 hydraulic horsepower has never been put in the field.

Okay. Got it. The last one, follow-up to questions Uhlmer's questions on the sand stuff, you mentioned a preference to doing more with third parties. Do you see yourself ever divesting your sand business?

Ever?

Is there still the benefit of being vertically integrated, how about that?

Yes.

There is the benefit.

It's probably a philosophical question. The short answer is no but -- because it does have strategic benefit during good times.

Okay. Fair enough. I'll turn it back over. Thanks for your time.

All right, John. Thanks

Ken Sill, Seaport Global Securities.

Thanks for taking my question, whether it's erudite or not (laughter).

We're never going to live that one down.

It was good. Not everybody will use the word like that on a call. I appreciate it. We've beaten a lot of things to death.

One particular question. Schlumberger is making a big deal of their BroadBand, and yet I look out there, it's just the concepts of the diverter chemicals. Is that a capability that you guys have? Are there diverter chemicals out there that do essentially the same thing you have access to?

Are you talking about the tertiary recovery stuff, Ken, or are you talking about--?

They are using -- the concept is you pump down in your fluid something that will expand and block off the zones that have hydrocarbons in them, so that your frac goes to zones that haven't been successfully treated yet. That's the concept. It's a fibrous material that is attracted to hydrocarbons. I know Baker says they can do it, Halliburton says they can do it, and Schlumberger has branded it with the BroadBand tag, so [needed the] new jobs that use it in recompleting existing wells?

The short answer is yes. Yes. We have the ability. Small now, but we do have that ability.

I'll have to talk about that one more offline. It's just interesting when something gets branded. I'm trying to figure out if other [companies] can do.

Another question that has been asked is you have got 70% of your crew staffed, which is a very good distinction. Are those guys working one-half the time? 60% of the time? Any rough idea how utilized the existing crews are?

40% to 50% is probably a pretty good number, Ken.

Okay. Then going back to pricing, what I've heard from people is that you and all the other larger pressure pumpers I've talked to said look we're not going to take any more work for below cash margin, there's no reason to do that. So what I'm hearing is that for new work, what you have said is for us to do something new or to bring [things out of] stack, the price has to be higher. So it's not necessarily that pricing has gotten better, it's just that people have reached the point of we're just not going to do it anymore. Has that point of indifference to not doing the work changed or is it consistently still you are not going to do anything at below cash breakeven?

The equation can be a little more difficult if a customer gives you 10 opportunities and you do all the designs and it turns out that one of them has to be at a loss but the other ones are good, you are going to take them all, right? But in the aggregate, it's a contributor. So we would not, in the aggregate, pursue work that was at a loss. That's where we've been, that's where we continue to be.

We would like to think that every time we price a job and execute a job, it turns out exactly like we price that and designed it. That doesn't happen, so never say never from that perspective, but clearly, that has been our strategy, it continues to be our strategy, that we are not going to work for negative cash intentionally or an extended period of time. That's our strategy, that's our intention, and we're sticking to that well at the current time; we are achieving that.

I'm encouraged by the fact that you say the bids are clustering, so it seems like everybody is coming to the same point of okay, this is where -- the range where we think we can work and why would we cut from year? Okay, that pretty much covers what I had. You guys are in a great position. Enjoy. When and if things ever turns around, it is going to be fun to see what the incremental margins are on the way up, but thanks for taking my call.

We look forward to that. Thanks, Ken.

Matt Marietta, Stephens Financial.

Hey, guys. Thanks for continuing the call here beyond an hour and taking questions. I was hoping to get D&A breakdowns by segment if possible, if you have that handy?

Matt, we do not have that handy right now. We'd be happy to get that to you. I just don't have the schedule in front of me. We will get that to you today.

Okay, not a problem. This line of questions has been beaten, but going back to M&A and growth prospects and the balance sheet. Given we're stuck here in this downturn, the issue that I have is does it really make sense to buy and grow equipment in a structurally different North America land market and will you guys be willing to buy or build idle equipment while your fleet and overall business isn't fully utilized? Or is this notion, your thought process, more of a potential diversification strategy.

I'm trying to understand the logic there. Most of your shareholders would agree that the balance sheet is the reason many of them really exist?

Yes. We worked really hard -- it was our goal. We worked really hard to pay our debt off and we've got this cash balance. I can't imagine why we would want buy unstaffed or negative cash flowing equipment or a company at this point in time and blow it on any amount of debt. That just doesn't make sense for us, it might make sense for somebody else, but not to us.

If there were an opportunity, my guess is if you were to put probabilities on it, it would be for diversification of some type, certainly technology differentiation or expansion but much more of that than trying to go out and buy additional hydraulic horsepower.

Okay. Thanks. And final one for me. I know we've also asked this question, but to get really precise here, do you know how much, on the attrition subject, how much horsepower that you are aware of, that for certain has been cut up and permanently impaired versus equipment where pumps' engines have been removed and resold to private investors at auction and considered equipment that is attrition. What's the differentiation there and are you aware of a certain number of equipment that has been cut and permanently impaired?

Matt, we don't have a good number on that. We know some specific things and we hear other anecdotes. It's probably not a number that's worth repeating.

The bigger factor -- there's an entire spectrum of what's happened over the past 13 months from companies that were cut up and the trucks went somewhere else, completely out of the oil field, all the way to private equity-funded companies that became insolvent and another private equity company came, bought the assets, hired back old management, started again. But the most frequently occurring value is just an idle fleet that's sitting in the yard and it's had fluid ends taken off of it and we just don't know. We truly don't know.

There's obviously a big option coming up in -- all over Texas and principally in West Texas and it wouldn't be surprising to see this equipment find a new hands at a much lower cost basis.

Right. Right.

Unstaffed.

Unstaffed. Yes. That's correct.

Okay. Thank you.

Thanks, Matt.

Byron Pope, Tudor, Pickering, Holt.

Good morning, guys. Very quick question which I think I know the answer to, but I'll ask it anyway. Just thinking about your historical commitment to the basins in the plays that you operate in, and if I seem to recall, it seems like roughly two-thirds of your frac horsepower has been in the Permian and in the Eagle Ford.

But for the other markets that you serve, I didn't hear anything on this call that suggested you are thinking about [retrenching] from any of those smaller plays, whether it be East Texas, East Oklahoma, Appalachia, or the Bakken, you are still committed to staying in those plays and servicing those plays for the next [sub] cycle. Is that fair?

There are a location or two where we have scaled substantially back and we probably need to be located in a different place, but at the current time, we are committed to continuing to operate in the long-term in all of the basins that have been active up to this point, so we have not permanently exited any particular basin that we've been active in up to this point.

Okay, thanks, guys.

Chase Mulvehill, SunTrust.

Thanks for extending the call. I'll be quick. To follow-up quickly on the sand question, do you have an idea of what percentage of the sand that you pumped in the Permian is actually brown sand?

Reasonable question, Chase. We actually don't break it out that way. In our discussions you and I have had, we've talk about resin coated natural ceramic. We do not have a brown sand break out. Don't mind trying to share that with you. Let me see if I even can find it.

Okay. So are you seeing more people [tail] in with RCS or ceramics?

No.

Okay. And on the cost of goods sold, can you help us understand how much of your fourth-quarter cost of goods sold is labor, consumables, and fixed infrastructure cost?

Yes, we can do that. I'll give you -- the quote I will give you and therefore everybody else is percentage of total direct costs that are the various things. The largest one is materials and supplies; everybody knows that's proppant and chemicals and all that sort of thing. That is in the 35% to 40% range of total operational costs.

The next biggest is employment cost, which is in the 25% to 30% range. I'm giving ranges here. Below that comes maintenance and repair, which is in the 15% to 18% range.

Okay. All right. That's very helpful. Thank you.

Last one in and I will turn it back over, there's a lot of -- we hear about cash breakeven, bidding, and for me it's a black box, trying to understand what people mean when they say cash flow breakeven. Do you fully load SG&A in your bids when you are saying you won't work below cash breakeven?

There's a lot of different ways to cut that. If you look at our P&L, we're generating consolidated EBITDA, so we do hope to cover SG&A, as well.

Okay, but when you bid at the field level, and you said you won't bid below cash breakeven, are you talking more at the gross margin level or the EBITDA level?

Actually neither. It's the EBITDA minus CapEx level.

Okay. EBITDA minus CapEx.

Yes. So there's another non-GAAP financial measure, if anybody is listening. Obviously -- maybe it's not obvious to everyone -- you don't know the maintenance CapEx that you are going to incur on a job that you are doing today because that maintenance CapEx is going to come a little bit later, so we have to make an estimate for that.

Okay. All right. That's helpful. Thank you.

Okay, thanks, Chase.

John Daniel, Simmons & Company.

Thanks for putting us back in. Just two quick ones for me. Thoughts on potential share repurchases this year? And would you use your balance sheet?

That's a possibility. Probably we need a little more clarity on the direction of the industry. We ended the year at $65 million in cash. We've got some other sources of cash, tax refunds and such, that are going to be coming in, so we're very comfortable -- presently, comfortable with our position, but I don't know that we would think it would be prudent right now to run out and try to use up that cash and put us back in debt. We're comfortable where we are right now.

Okay. Fair enough. Don't know if you have these numbers handy, but what percent of your fleet is either Tier 4-compliant or dual fuel?

Don't know, John. A small percentage of it is dual fuel. That was done at customer request -- [retrograde] customer request -- that's a small percentage. Tier 4-compliant? I won't even hazard a guess. It's a decent percentage. Probably all the new stuff is, but I don't know that for sure. I can follow-up on that and try to figure it out or try to tell you.

Okay. That's all I got. Thanks, guys.

Thanks, and I am informed that there are no more questions, so I am going to take over the operator's role right now. We've enjoyed the discussion. We appreciate the chance to talk to everybody and we appreciate everyone's interest during a difficult time. So we are going to say goodbye for now, but look forward to talking to a lot of you soon.

Operator, you can take over and do your close, if you want.

Thank you. I would like to remind everyone that the conference call will be replayed on www.RPC.net within two hours following the completion of the call. This concludes today's conference. Thank you for your participation. You may now disconnect.